Execution Strategies in Fixed Income Markets

Robert Almgren

Reducing trading costs and slippage is a universal concern of asset managers. Although the decision of what assets to hold is still the most important aspect of investing, poor execution of trade decisions can subtract many basis points from overall return. Conversely, having an effective strategy to execute trades and to measure transaction costs can enhance returns: “A penny saved in slippage is a penny earned in alpha”.

Execution techniques in equities have advanced far ahead of those in other markets, such as futures, options, foreign exchange and fixed income. Reasons for this are the overall size of the equity markets and the widespread use of active investment strategies. Another is the simplicity of the products themselves: for trading a single name of stock you need very little information beyond its price. Relationships between different stocks are at best weak. As a consequence, quant researchers in equity markets have focused intensively on the details of the execution process.

By contrast, fixed-income products are inherently complex, and quantitatively minded researchers in this area have focused on such aspects as yield curve modelling and day counts. Asset